How do you tell if your agency is match-fit?

After years of dedication and hard work, the thought of selling your agency has crossed your mind. But how do you know if you are truly ready to step into the ring? What are the value drivers affecting the business of agencies?????????

?At Agency Futures we help agency owners to develop their firm to achieve a winning exit. It’s probably no surprise that we often come up against the same challenges.

To some of you, many of these points may seem obvious parts of agency management lore.

But based on our experience that just isn’t the case.

So, as Andre Gide famously wrote, “Everything has been said before, but since nobody listens, we have to keep going back and beginning all over again”.

Here are 11 drivers of agency value to a potential buyer.???????

1. Market Positioning and reputation: A strong identity and reputation significantly impacts buyer interest. You need to have a strong position within your category that is backed up with outstanding work.

Tip: Don’t try and invent a new category, buyers are fairly black and white about what they want: digital, creative, social, influencer, data and analytics, CX, whatever. The key thing is to differentiate your agency within the category.

2. Profit sets you free: I wish I could remember who first shared this statement with me decades ago, but it's just as true today as it was then, regardless of your agency proposition. So how are you faring against some of the key financial benchmarks for the industry?

a.??? % EBITDA to Gross profit* (GP). If you’re under 15% profit on a regular basis, then questions will be asked (that is, if you are lucky. Many buyers will discount you immediately). Above 20% then great. Above 25%, gold star! (Yes - this is possible and we see it in 1-2% of agencies).

b.??? An ideal laydown as a % of Gross profit would be 25% to EBITDA, 55% to staff, 20% to other. Increasingly, agencies spend more on staff and less on ‘other’ (office costs etc.), especially in the change to remote working. Generally, though, if you’re spending north of 65% of GP on staff then you will be seen as bloated or inefficient.

c.???? Are you reporting well, monthly and are your financial systems robust? Do you have a business plan? Could you respond quickly to ad hoc finance information requests? What are your monthly management reports like?

3. Operational Excellence: Are you a well-structured agency with streamlined operations? Are your processes efficient and scalable to accommodate growth? How do you drive continuous improvement? Are you employing technology (Including AI) to continuously improve efficiency? Is this well documented?

4. Client Portfolio: Buyers are looking for reliability of future earnings. How has your client list changed over time? Buyers generally like to see an average client tenure of over 3 years (with a mix of new and old) with no one client exceeding 15-20% of GP.

5. Talent and Leadership: Agencies with outstanding leadership and an empowered management team are attractive. A shining culture is an incredibly magnetic thing. What’s yours truly like? How do you stand on aspects like succession planning, training, and team structures for success? How does the business operate when you aren’t there?

6. Repeatable Revenues: Buyers like to see reliable revenue streams, such as retained clients. Even better if you have some proprietary tech or process that delivers recurring revenue, or achieves client ‘stickiness’. If you’re a project shop - that’s OK, but you’ll need to impress in other areas.

7. Growth momentum against a strategy: A track record of good growth, coupled with a compelling action plan for the future is optimal. In our experience, a lot of owners forget this last bit in the desire to cross the finish line. Which brings me to...

8. The finish is the start. Remember acquirers are buying future-proof revenues and capability. Often sellers see the transaction close date as the finish line. Yet for buyers it is actually the starting line and generally you’ll need to be part of the next stage of the journey. So a business growth plan (that you are actually working to) is important, along with tons of energy and enthusiasm for the future!

9. A pipeline. Linked to #8, a new business pipeline is critical. This will likely be a part of a progressive business development programme. Opportunities will be captured and reported in a way that weights each stage of the funnel to produce a pipeline value. There are plenty of tools that can help you with this last bit, but a formalised programme must be there.

10. A few other boring bits (aka dealing with skeletons)

a.??? Is your balance sheet clean? No dodgy shareholder loans?

b.??? Legal and Compliance: Are these in order? Do you have any outstanding legal or staff issues?

c.???? Client contracts, do you have them? Are they up to date?

d.??? Cap table, how messy is your ownership structure? Better to do the work upfront to tidy this up.

e.??? How do you incorporate risk management into your approach? Do you maintain a risk register?

11. Lastly, a word about scale. In addition to all of the drivers above, generally, the bigger the agency the higher the multiple of profit that will be used to value it.

For profit levels of under $1M expect 3-5X EBITDA, $1-$2M 5-8X, $2-5M 6-9X.. and so on (and yes, there are plenty of exceptions to these guidelines).

Primarily this value difference is about risk mitigation - bigger generally means safer. But also lower total profit means fewer buyers. Many buyers will not consider going through the process of acquiring a business under a certain size as due diligence costs can be prohibitive (one buyer we know routinely spends $500K per DD process).

Also, larger or ‘institutional’ buyers just aren’t interested in a deal that doesn’t move the needle on their group profit. That’s why 'deals of consequence' are typically >$US10M.

That said, there are still plenty of deals to be done in the $2-10M enterprise value range and these are often referred to as ‘bolt-ons’ (as opposed to ‘platform’ investments). Often these will plug capability gaps in an existing portfolio business, or allow smaller independent agency groups to grow inorganically.

Some conclusions

Hopefully this post has triggered some thoughts. I doubt that there’s a single agency that is actually perfect in every area, and in some ways, as they say, perfection can be the enemy of good. The key here is awareness: identify your gaps and develop plans to close them.

You have to remember that for buyers the acquisition process is simply about getting maximum growth for minimum risk. So the more match-fit you are, the more you will be seen as a low-risk and attractive proposition.

Even if you aren’t considering exiting your agency, a focus on fitness will help to deliver against key goals, such as solving big client problems, nice dividends, work/life balance, happy staff or simply honouring the craft that you love.

Getting there is fiendishly difficult - we know, we’ve been there too, but it is absolutely possible. We have seen some truly remarkable turnarounds over the years!

Hope you find this useful, and we’d love to hear any feedback that you have. We’re here to help so please touch base if you have questions or suggestions.

To your limitless success!

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*For clarity, Gross Profit is what our industry confusingly refers to as revenue, gross margin or AGI. It is what you invoice the client less external costs such as media, print, photography and before internal costs are factored in (and there are some other nuances here, but that's for another time).

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